Japan must brace itself for JPY 100-200b deficit

And trade balance is no better picture.

According to DBS, a deficit of JPY 100-200bn is expected. This would be the second consecutive month of current account deficit, as trade deficit remained large and income account surplus fell due to seasonal factors. The seasonally-adjusted current account is expected to stay in a small surplus of JPY 200bn.

The current account weakness is likely to continue this year. DBS expects exports to pick up gradually on the back of global recovery, JPY depreciation and normalization of Japan-China trade relations.

Here's more from DBS:

But trade balance is unlikely to improve significantly soon, as imports will remain elevated due to 1) fiscal policy expansion that boosts domestic demand, 2) increasing dependence on non-nuclear power that requires larger amounts of energy imports, 3) export recovery that drives imports of intermediate goods.

Meanwhile, the income account surplus is likely to narrow this year, due to the lagging impact of global slowdown on the earnings and dividends received from outward investment.

On the other hand, capital outflows under the financial account would remain large this year. Outward FDI is unlikely to slow simply due to JPY depreciation.

The key factors motivating Japanese companies to invest overseas are the better access to emerging markets with stronger growth prospects and markets with lower production costs, which are structural in nature.

Regarding the portfolio investment, while foreign interests on Japanese equities are rising due to brighter growth outlook in Japan, sentiment on JPY bond investment could be weighed down by the widening of fiscal deficit and risks of sovereign rating downgrades.

In addition, inward investment in money market instruments may also fall due to recovering risk appetite in the global market and receding demand for safe assets.

Overall, the balance of payments outlook this year supports the view of JPY weakness.